The missing linkages?

Is steel a strategic industry with an occasional need for state intervention to preserve it? The industry made headline news in the UK again this week, with the government struggling to come up with a coherent response to the prospect of thousands of job losses amid factory closures across the country.

The Economist magazine, true to form, is against some form of industrial policy, instead favouring labour market policies to help displaced workers to find new employment. It is right to say that imposing tariffs, which would require EU permission, would lead to higher steel prices than otherwise. Nationalisation or some form of subsidy would ultimately require higher taxes or public borrowing. But it fails to address the issue raised by Jeremy Corbyn, the leader of the Labour Party, of whether or not steel is a ‘strategic’ industry and how this might shape any policy intervention.

In the industrial policy literature, an industry can be considered strategic if it has significant forward and backward linkages with other companies and sectors. In the language of neo-classical economics, the issue is whether there are positive externalities or spillovers to steel production. The linkages could be inputs required for steel production that are domestically produced or, for example, the car industry which uses steel in its own production process.

If these kinds of linkages are substantial, then far more jobs than are preserved in the narrow confines of the original industry are threatened by the closure of its factories and the loss if its workforce. During the rapid growth phase of countries such as South Korea, the steel industry was protected as an ‘infant industry’ until it was internationally competitive. The policy was highly successful and played a significant role in the country’s rapid development.

This is not to say that industrial policies which aim to protect particular industries are always a success. In the history of capitalist development, many infant industry firms have failed to become competitive, leading to subsidies which sustain inefficiency and produce net losses in social welfare.

The point is that the issue of protecting the UK steel industry is more complex than the Economist makes out, once one takes industry linkages into account. In addition, the jobs lost are likely to be higher paid than those that might replace them, in what is likely to be the service sector. Labour market policies can help the unemployed into new jobs, but if they are lower paid, this will reduce a source of spending power in their local communities.

The US has responded to the global supply glut of steel by slapping punitive tariffs of more than 250% on Chinese imports. This may well be more sensible as a temporary measure which, although it increases the relative price of steel there, will help to secure the future of the industry.

A substantial restructuring is needed in the Chinese steel industry, and possibly elsewhere. Chinese State-Owned Enterprises (SOEs) have responded to slowing growth in domestic demand by increasing exports and driving down the global price. This is helping to drive the collapse in production in countries with less state protection available.

Another issue for the UK is the weakness of the euro, which is helping steel producers in the Eurozone sell at lower prices than domestic producers.

Ultimately, all steel producers have to be internationally competitive in order to export. But a total collapse in the UK would have major social costs as well as potentially weaken the manufacturing sector, which remains a source of economic dynamism despite its small proportion of UK GDP.

Some temporary form of protection of UK steel may be called for, EU restrictions notwithstanding. A weaker pound would also help, alongside an EU-wide response and pressure on Chinese SOEs to restructure and reduce their international dumping. Protection should be combined with policies to help increase efficiency and ensure longer term survival. And if the linkages are preserved, the benefits of sustaining a steel industry in the UK could well ensure continued positive spillovers in terms of productive employment in manufacturing and related services.

The steel issue is more nuanced than some commentators have made out, and some ideas from the theory and practice of industrial policy offer greater illumination.

About Me

I have an MSc in development economics from SOAS, University of London and, while I now work for a charity, I remain passionately interested in the subject and how it can be used to promote sustainable human progress.
Apart from economics, I enjoy reading, walking, Qi Gong exercise, classical music, following professional tennis and athletics and spending time with friends and family. I also take an interest in politics, usually focussing on policy rather than personality, so that I don’t get too fed up with it.